Small Business Owners and Credit Evaluation

Article excerpt

By Experian's Business Information Solutions Group

Credit managers rely heavily upon external data sources to guide them in the credit decision process. To approve or reject a loan request is a delicate task. A credit manager must evaluate the risk associated with extending credit versus declining an applicant based on numerous factors. all the while, he or she is driven by the desire to generate revenue for the company. This article explores the credit evaluation process, particularly as it relates to small businesses.

The natore of credit evaluation

The need for sufficient and reliable information is the foundation of a successful credit decision. A credit manager may call on references, run background checks, pull a credit report, verify bank accounts or ask questions of the applicant to validate the information on the credit application. Credit managers are challenged with the task of obtaining readily available information to support their decision while sending a timely response to the applicant. A major obstacle in achieving this task is the turnaround time associated with checking references. The process varies from business to business and may include a background check, a verification of a bank deposit or credit references with existing suppliers. Some businesses require written requests, while others may offer to do a phone interview at their convenience. In either case, the "waiting game" is the most challenging aspect.

The nature of the reference check also is skewed to a certain degree. In all likelihood, the applicant will list accounts or business relationships that he knows will produce a favorable statement. For example, consider a business that has an open or closed collection account. It is highly possible that the applicant will withhold this information on his credit application. Such information, however, will appear on a business credit report.

Not having enough information to support the credit decision can be a nightmare for any credit manager. If the applicant owns a large business, chances are the business credit report on his company will suffice. However, if the business is a small to midsize or a start-up operation, it's likely the business credit report will have very limited information.

So what constitutes a robust business credit report? For some, the answer depends on the amount of credit being considered. For instance, if the applicant is asking for $100,000, chances are, as a credit manager, you'll want or expect a credit report with lots of information to help support your credit decision. Conversely, if the amount applied for is only $1,000, you may just want to know that the business exists. A credit report, even if it has limited information, may be just enough to steer you toward the right credit decision.

Following is a list of data elements that normally would populate a robust business credit report. As you look over the list, imagine what you would do if a report on a small business had just one of these items. Then ask yourself, "Is this enough information for me to make a sound credit decision?"

To illustrate this example, we will refer to the company applying for credit as Company A. Here is the information that goes into the process:

* A tradeline represents an existing business relationship with a vendor or a supplier. In this case, the vendor is supplying data to the credit-reporting agency with regard to Company A's record of payments for services provided by the vendor.

* A collection account represents an account that has gone into major delinquency status. Generally, this involves an account that is at least ISO days late where efforts to bring the balance current by the vendor have been exhausted. In this case, the vendor is relying on a third party, a commercial collection agency in this case, to collect the entire balance or at least a portion of it.

* A bank relationship validates the existence of the business from a financial relationship point of view. …